The only person at a party

The end of an era in Indian equity markets

I suppose none of you would ever want to be at the party where you are the only guest. Not only is the party not going to be fun, but there is also the risk that the party might shut down because nobody else is at the party.

This is possibly what Standard Chartered Bank (StanChart), and the investors in in its Indian Depository Receipts (IDR), must be feeling like now. This instrument, allowing companies listed abroad to do an additional listing in India (in rupee-denominated securities), was introduced in 2004, but there had been no takers for it until 2010 when StanChart decided to issue stock in India in additional to its listings in London and Hong Kong.

Even when the IDRs were initially sold in 2010, the response had been tepid, with the portion reserved for retail investors (yes, Indian IPOs earmark portions of the issue for retail and institutional investors) being undersubscribed.

The first-ever issue of Indian depository receipts (IDRs) went down to the wire, with a late rush by institutional investors to bid for the receipts helping Standard Chartered Plc see the issue through despite a lukewarm response from retail investors.

Institutional investors bid for more than twice the number of shares on offer while retail investors subscribed to less than half the IDRs reserved for them.

Perhaps that had a bearing on what happened, or didn’t happen, after that, since no other company bothered to issue IDRs. And what followed was not unexpected - institutional investors either sold off their holdings or converted their holdings into shares of StanChart listed in London or Hong Kong (that’s one feature of depository receipts - they are convertible to company shares listed in other markets at a fixed ratio).

As of March 2019, the total volume of StanChart IDRs outstanding had come down by a factor of 8 (from ₹25 billion to ₹3 billion). The Economic Times had then reported:

Foreign institutional investors (FIIs) held 70 per cent of IDRs post the 2010 listing. Their total shareholding is down to 4 per cent. Currently, nine FIIs hold IDRs. Domestic mutual funds who bid for 63 lakh receipts during the IPO, have all exited the IDRNSE -2.98 %. This exit of both foreign and domestic institutions has led to a steep fall in the trading volumes of the IDRs. Retail investors’ holdings have increased from 3 per cent during the IPO to 74 per cent now. 

“We continue to support the IDR program. Since 2013 we have implemented two-way fungibility as per SEBI circular. IDRs are now subject to a continuous process for redemption of IDRs into shares and conversion of shares into IDRs,” said Standard Chartered Bank, responding to a query sent by ET. 

Well, it turns out that StanChart didn’t continue to support the IDR program for that much longer. The Business Standard reports:

In March, the bank launched its 90-day termination programme, which ends on Monday, after which the sole IDR will no longer be traded on the Indian bourses.

“We are providing all necessary assistance to our IDR holders to complete the relevant formalities for the termination of our IDR progra­mme,” StanC said in a statement to Business Standard. Under the programme, IDR holders have opted to convert their holdings into underlying shares or cash out at the prevailing market rate in London.

[…]

“There are multiple factors why IDRs never took off. The discount to traded price was higher than what issuers were willing to offer. Also, the restrictions around fungibility dried out the liquidity in these instruments. Further, the IPO disclosure requirements and review process were too cumbersome, which discouraged potential issuers,” said Sudhir Bassi, executive director, Khaitan & Co.

Now that the party is empty, don’t expect anyone else to come in any time soon.